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Ask HN: Serious question, why is short selling allowed?
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Re: Ask HN: Serious question, why is short selling allowed?
#2Look for wirecard
Re: Ask HN: Serious question, why is short selling allowed?
#3Short selling is a really useful tool.
Say the price of potatoes is $100 per pound today, but my potatoes aren't ready until next week. Well, I can take out a short contract to lock in the price and when my potatoes are ready I sell the potatoes and close the short.
I'm covered in both cases. If the price goes down I will make profit on my short contract but less price on the potatoes. If the price goes up then my short will lose some value but the increase in my potatoes will cover the losses. In either case I will have gain the $100 I was expecting.
Re: Ask HN: Serious question, why is short selling allowed?
#4To prevent the market from thinking that a company worth $0 is worth $4 billion
Re: Ask HN: Serious question, why is short selling allowed?
#5To prevent the market from thinking that a company worth $0 is worth $4 billion
Heh. Thanks for the laugh.
Re: Ask HN: Serious question, why is short selling allowed?
#6Short selling is a really useful tool. Say the price of potatoes is $100 per pound today, but my potatoes aren't ready until next week. Well, I can take out a short contract to lock in the price and when my potatoes are ready I sell the potatoes and close the short. I'm covered in both cases. If the price goes down I will make profit on my short contract but less price on the potatoes. If the price goes up then my sh…
That’s an example where you (almost) have the underlying goods, and then, short selling indeed is a useful tool.
The problem is with naked short selling (https://en.wikipedia.org/wiki/Naked_short_selling), which doesn’t require you to have the potatoes at all. So, it takes less investment to do, but of course, if, next week you have to cough up the potatoes, and the prices did go up, your losses can be huge (basically, in the ‘covered’ version, most of your money is in the potatoes, not in the futures. With naked short selling, you can invest all your money in very volatile potato futures. That increases your risk)
Re: Ask HN: Serious question, why is short selling allowed?
#7Re: Ask HN: Serious question, why is short selling allowed?
#8Short selling gives additional financial incentive to research companies and figure out which ones are full of it. That's useful to the market overall, not just to the short-sellers themselves.
Re: Ask HN: Serious question, why is short selling allowed?
#9I don’t have anything against shorting – still a very interesting question!
Re: Ask HN: Serious question, why is short selling allowed?
#10Short selling is a really useful tool. Say the price of potatoes is $100 per pound today, but my potatoes aren't ready until next week. Well, I can take out a short contract to lock in the price and when my potatoes are ready I sell the potatoes and close the short. I'm covered in both cases. If the price goes down I will make profit on my short contract but less price on the potatoes. If the price goes up then my sh…
That’s an example where you (almost) have the underlying goods, and then, short selling indeed is a useful tool. The problem is with naked short selling ( https://en.wikipedia.org/wiki/Naked_short_selling ), which doesn’t require you to have the potatoes at all. So, it takes less investment to do, but of course, if, next week you have to cough up the potatoes, and the prices did go up, your losses can be huge (basica…
That's the reason margin requirements exist. If the trade moves against you, there's an amount of money in your account that will be used to settle the transaction. If the trade moves too far against you, your broker will close the position for you at a loss.